Ten 'plan b's for the London Stock Exchange

MichellePrice

The collapse of the London Stock Exchange's (LSE.LN) merger with TMX Group (X.T) throws the future of the London exchange into question.

The exchanges entered into a merger agreement in February to create a commodities listing powerhouse but were forced to terminate the deal yesterday when it became clear that they could not secure the necessary support from TMX shareholders amid a storm of opposition.

But it need not be a complete disaster for the iconic London exchange. Its share price rose 4.8% by midday, while short-selling of LSE's shares--which increased since on news of the deal-- has declined steadily in recent weeks.

The collapse of the deal is a "blessing in disguise," according to Simmy Grewal, an analyst at Aite Group. She said: "I see this as a good thing. The TMX deal was not a top-tier deal in my view, and this--combined with the other shifts in the market created by other exchange M&A deals--gives the LSE some other options."

The LSE will almost certainly be forced to do something in order to further globalize and diversify its franchise, and to prevent itself being entirely dwarfed by other major deals in the pipeline, the NYSE Euronext tie-up with Deutsche Börse being the most notable.

The Maple consortium--an all-Canadian group of banks and pension funds that counterbid for TMX--may yet find that yesterday's victory is short-lived, given the tremendous competition concerns that its proposed takeover, which would give the merged group around 90% of Canadian equities trading, is likely to encounter. The LSE may be able to bide its time and swoop back in to reclaim TMX if Maple's own bid fails, although it may encounter a second round of nationalist opposition.

*Hello Nasdaq, again

If Rolet is determined to do a big deal, then the most obvious answer is for the LSE to reprise its 2006 discussions with Nasdsaq OMX
NDAQ, +0.85%
which has been left on the sidelines by the recent spate of merger mania. The deal would give the LSE a much-needed U.S. presence, and in turn offer Nasdaq OMX, a proper presence in central European equities, but it would remain an equities-heavy franchise.

*Hong Kong calling

The Hong Kong Stock Exchange, which has deep pockets and a strong commodities listing franchise, is another oft-cited potential partner. A deal between the HKEx and the LSE would allow the UK exchange to pursue its vision of becoming an international commodities listing powerhouse, albeit as the junior partner. However, it remains to be seen if the HKEx, which is sitting pretty as the gateway to China, would be interested in looking West.

*Chase the sun

As Asia-Pacific's most structurally progressive market, the Tokyo Stock Exchange could be an attractive potential partner. Like the LSE, the TSE is feeling the heat of competition in its secondary market from Chi-X Japan, and will have to do something before the opening up of the domestic Chinese market makes Tokyo an irrelevance. But a deal with the TSE, which is demutualised but not listed, could prove more painful than the Canadian ordeal.

*Singapore sling

If neither come off, the Singapore Exchange would be the next natural option. Magus Boecker, chief executive of SGX (S68.SG) and LSE Chief Executive Xavier Rolet, can now compare battle-scars. Both have had their Big Deals scuppered by nationalist opposition: in the case of SGX, its deal with the Australian Securities Exchange fell apart in April. The SGX is more likely than the HKEx to be open to a deal, which would create the first Europe-Asian exchange platform. But this would not solve the LSE's North American problem.

*Look Down Under

On the other hand, the LSE may prefer to go for the SGX's tricky ex-partner, the Australian Securities Exchange, another commodities-listing hotspot. The ASX wants to develop scale and global reach, but has had its ambitions quashed by domestic politics. A deal with the LSE may be a more culturally palatable pairing for the Australians, but the similarity of the Australian and Canadian markets creates the risk of a Canada-Singapore repeat.

*Go Bats

Much as the Bats Global Markets management would loath the suggestion, the LSE could explore an outright takeover of the US exchange operator, which owns one of the top four US equities markets, a burgeoning US options platform, and has the Bats Europe franchise. Bats has announced a mini-IPO to realise some of the value in the six-year old exchange operator, but this may be postponed if Bats fails to complete its takeover of Chi-X Europe. A cash offer from the LSE might persuade some of the Bats shareholders, giving the LSE a US franchise.

*Focus on clearing

The Anglo-French clearing house is in play, with several players circling. Although the LSE has said it is not pursuing a deal with LCH.Clearnet, some analysts think it ought to be. By taking over LCH.Clearnet, which already clears for the London exchange, the LSE could pick up its own equities clearing, listed-derivatives clearing and OTC clearing, franchise, allowing it to develop a compelling post-trade services platform. But this would still leave the exchange groping for a deal that would create the execution volume.

*Small is beautiful

Many market-watchers, including this publication, have questioned the viability of the mega-deal, which remain unproven as strategy for delivering economies of scale and shareholder return. Instead of pursuing blockbusters, the LSE may prefer to develop smaller-scale tie-ups and small- cross-holdings with other exchanges and share-trading operators, which would give it additional geographical reach with lower risk. But it would be a slow way to develop the scale necessary to make the LSE a top-tier player.

*Just keep at it

Despite a few hiccups, Rolet has done a good job of diversifying the London-exchange during the past two years, with the acquisition of MillenniumIT and Turquoise and the build-out of its post-trade business which helped to buoy an excellent set of full-year results that showed profitability up 68%. Rolet can continue to develop the business organically, although this would only suffice in the short-term.

LSE declined to comment for this article, but in a statement last night Rolet said: "Our group is in good shape and financially robust.

"Whilst the merger with TMX Group was an exciting opportunity for LSEG, we continue to see other significant growth opportunities across our well-positioned capital markets, information services, technology and post trade businesses."

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